There are few businesses that have such a comparably huge impact on people’s daily lives as Microsoft, Amazon, Alphabet (Google), Facebook, and Apple. These companies provide the services each and every one of us use on a regular basis. These behemoths own the platforms where we spend a big portion of our free time, where we shop, and where we work.
Just think of that. A large part of the world population uses Microsoft software and cloud services (at work and in private), so many of us have iPhones from Apple to communicate with our friends. We “google” to search for information on the internet (in fact, Google to some extent became synonymous with browsing the internet), we shop via Amazon, we connect and socialize via Facebook, Instagram and send text messages to friends and our loved ones via WhatsApp.
So, it’s no surprise at all to see these couple of businesses in so many stock portfolios. Not only growth- resp. tech investors, but Bue-chips investors, in general, want to have exposure to the tech sector and in these dominant players in particular. People literally HAVE TO OWN pieces of these wonderful businesses to participate in future growth patterns and opportunities.
The interesting question is whether these businesses will be able to continue their phenomenal growth.
Just look at Facebook for instance. It is so much more than a social network. With properties such as Facebook Messenger, Instagram, and WhatsApp it provides people with an ecosystem. Facebook is networking, messaging, photo, style, promotion, etc. and with its service, Facebook Shop has become a player in e-commerce. The company’s balance sheet is pristine with a cash balance in the tens of billions of dollars, it’s an incredibly profitable business.
But can these unique strengths be topped? Or are the glory days over? Are Facebook, Apple, Alphabet, and their likes hopelessly overvalued and overappreciated?
Well, we don’t have to go back too long in history and try to make some analogies and make some realistic assumptions.
Let’s look at businesses like Coca-Cola, PepsiCo, Mc Donalds, and Colgate-Palmolive for instance.
It was in 1989 when the famous investor and funds manager Peter Lynch said the following (while referring to Colgate-Palmolive):
“How much can you expect to squeeze out of Colgate-Palmolive? You aren’t going to become a millionaire off it … With the stalwarts, you have to consider taking profits more readily.”
His view made a lot of sense. I mean, Colgate-Palmolive, Procter & Gamble, etc. were already huge thirty years ago. How much growth could one expect going further? Wouldn’t it be more intelligent to take profits and put the money somewhere else?
Today you could ask as well, how much room for growth there is for Amazon or Facebook, etc.?
Well, let’s get back to our Peter Lynch quote regarding Colgate-Palmolive: if one had invested roughly USD 20’000 in that stock back in 1989, only 25 years later, that investor would have been a millionaire on that investment alone (book value gains plus dividends). Let’s that sink! It is absolutely remarkable, isn’t it? I mean, that company was already large back then.
Well, if you look at MC Donalds for instance, it’s quite a similar story. We could add tens of blue-chips stocks that would have performed comparably well.
Just to be clear: there are of course businesses, formerly giants, where it is crystal clear, that the glory days are over. Just take General Electrics, the car companies like Ford or GM.
But, when you take the stalwarts people saw 25 ago as a group and look at how their businesses and stocks have performed, you clearly see: these dominant businesses have been fortune makers. And more often than not, they still are today.
With the blue-chip stalwarts, there is a tendency to underestimate their growth potential.
How much larger can Facebook get? Maybe it has to split up due to regulations, privacy issues could be a drag, reputation problems, etc. From these standpoints, it certainly isn’t a no-brainer investment case.
Well, fair enough. But one should never ignore the potential for huge shareholder value growth lying ahead. Technology gains, new products, and market opportunities, the potential for acquisitions, share buyback programs, the initiation of dividend payments, etc.
Always look at the strength that builds the basis for the “profit engine”. Does Facebook have the potential to grow in a high single-digit range annually for the next twenty years?
Hey yeah, of course, one might say. Currently, Facebook is growing in a double-digit range, the company has not even really started to monetize all its platforms, so there will be massive top and bottom-line growth ahead.
Well, then look back at Colgate-Palmolive and compare: that company grew revenues in a high single-digit range annually. That’s 50 % less than Facebook. And still, Colgate-Palmolive built private fortunes.
That’s not to say, that even companies like Facebook, Amazon, and Alphabet can be disrupted, lose their way, face eroding market positions, etc.
But as a group, it’s likely that their performance for the next 25 years will be comparable to the ones of Johnson & Johnson, P&G, PepsiCo et.
When it comes to investing, stock prices, the quality of the businesses chosen, and the diversification of the portfolio are tremendously important.
And when it comes to building a group of potential long-term winners, Facebook even tops its peers in terms of attractive share price.
Facebook, given its uniquely dominant market position combined with a reasonable stock price, offers a nice margin of safety. That sets Facebook apart e.g. from stocks of Apple which sports a relatively high valuation.
Facebook is one of the very few stocks, investors with a long-term view should really have a look at.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action